When you think about innovation and the market-moving solutions of the past century, what do you think of? IRAs, Roth IRAs, Exchange Traded Funds and mutual funds are all great examples of innovations that have truly changed how people invest. What mutual funds did for the accumulators years ago, indexed annuities are about to do for retirees. Indexed annuities are creating a marketplace for products that offer baby boomers safety, lifetime income, potential for attractive returns in a low interest-rate environment and death benefits.
Part 1: Annuities go with the flow
In a recent nationwide poll 75 percent of baby boomers said that they were worried about inflation, or the fact that prices will rise faster than their income. A colossal 73 percent were also worried about not having financial security in retirement, and—as stated in my previous article—over half of all baby boomers have had to delay retiring because of these discouraging facts. Sadly, these numbers should not be very surprising so anyone; baby boomers have had to endure market loss of 50 percent on two separate occasions over the past decade. What might surprise you is the lack of knowledge that is out there in regards to annuities.
Gary and Betty
In 2008 my office took a call from prospective clients named Gary and Betty who had been referred to us by current clients. If you remember one thing from this article, it should be Gary and Betty’s story. Gary had retired in 2006 and had simply rolled all of his company investments from a 401(k) to his financial advisor. Gary had been working with his advisor for years and the advisor seemed to have done a decent job in growing their nest egg. Gary and Betty were in their 60s and had explained to their advisor that they needed about $3,000 a month from their investments to supplement the Social Security they were collecting. Gary had worked hard and had saved about $800,000 in his various company-sponsored retirement plans. The advisor explained to them that taking 4 percent to 5 percent out of the account’s value would not be a problem; in fact, it would be easy since the markets had been returned about 9 percent for the past 100 years.
Fast forward to the fall of 2008 when the stock market came crashing down. Lehman Brothers had just collapsed, Merrill Lynch was in talks to be sold, and AIG had just announced their billion-dollar bombshell. Gary’s advisor had him fully invested in the market, and he did not even bother to call Gary about the sudden drop in his account values. Gary called his advisor and turned the distributions off since the account had lost about 40 percent of its valueit was now at a staggering $420,000. Gary and Betty had trusted their advisor and the markets with their life savings only to be set back by events that they had no control over and no way to forecast. What could they have done differently? Could this have been avoided?
Panicked, upset and lost, Gary started talking to friends and neighbors about his dilemma. Gary was shocked to find out that some of his friends had accounts that had not lost anything despite the fact that their interest was tied to a stock market index. He was intrigued enough to call and set up a meeting with our firm.
Baby boomers want to have a hassle-free retirement with guarantees, and above all else they do not want to lose money. If Gary or his advisor had positioned his money to start producing income, then maybe he would not have had to go back to work. Remember, the investments that clients use prior to retirement are not the same investments that will carry them through their golden years.
Sometimes life teaches us hard lessons. Gary and Betty ended up hiring our firm, and to this day Gary still asks us in every review why he did not meet us before he retired. He and his wife ended up taking part time jobs, but beginning next year the annuity we put them in will provide them with guaranteed income that will meet their needs and will never be affected by a downturn in the stock market. If you are in the business of helping baby boomers retire, you need to be sure that they are able to retire once and stay retired; you owe it to them to look into indexed annuities with living benefit riders.
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